SEC Investor Advisory Committee previews recommendations on SPACs and 10b-5 trading plans before September 9 meeting

By Lene Powell, J.D.

The SEC Investor Advisory Committee has released two draft recommendations scheduled to be considered at its September 9 meeting. Two subcommittees recommend enhancing focus and enforcement around the adequacy of disclosures by Special Purpose Acquisition Companies (SPACs). In addition, a subcommittee recommends taking steps to establish "meaningful guardrails" around the adoption, modification, and cancellation of Rule 10b5-1 trading plans.

SPAC disclosures. In the draft recommendations relating to SPACs, the Investor as Owner and Investor as Purchaser Subcommittees state that the recent popularity of SPACs has raised investor protection issues. The subcommittees note that the SEC’s 2021 regulatory agenda includes a topic on SPACs, and that SEC staff have already taken steps to address SPAC regulatory and investor protection issues.

The subcommittees make preliminary recommendations that the SEC focus on the adequacy of SPAC disclosures in the following areas:

• The role of the SPAC sponsor (and/or insiders or affiliates such as celebrity sponsors/advisors), including any potential conflicts of interest;
• The economics of the various participants in a SPAC process, including the "promote" (e.g. "founder shares") paid and their impact on dilution;
• The mechanics and timeline of the SPAC process;
• The opportunity set and target company areas of focus;
• The competitive pressure and risks involved in finding appropriate targets and reaching market acceptable prices for those companies;
• The acceptable range of terms under which any additional funding (e.g. public investment in private equity "PIPEs") might be sought at the time of acquisition/redemption;
• The manner in which the sponsor plans to assess the capability of potential targets to be a "‘34 Act company" from a governance and internal control perspective, and whether the sponsor will take any steps to ensure the target company can meet minimum preparedness/quality standards for operating as public company;
• The minimum pre-de-SPAC diligence the sponsor will commit to regarding the accounting practices used by the target company.

Additional SPAC analysis. In addition to enhancing focus on disclosure adequacy, the subcommittees recommend that the Commission prepare and publish an analysis of the players in the various SPAC stages, their compensation, and their incentives. Based on the results of the analysis, the Investor Advisory Committee may consider additional recommendations.

10b5-1 trading plans. In the draft recommendations relating to 10b5-1 trading plans, the Investor as Owner Subcommittee stated that the adoption of Rule 10b5-1 in 2000 provided an avenue for employees to legally trade stock-based compensation while in possession of material non-public information about the company. The rule was adopted at a time when compensation among executives and employees in many industries was trending away from fixed salary and toward variable equity-based pay.

However, the subcommittee stated that many observers have expressed concern since the adoption of the rule that 10b5-1 trading plans may help shield opportunistic insider trading from legal, regulatory and market scrutiny.

SEC Chair Gary Gensler recently stated a concern that Rule 10b5-1 has "led to real cracks in our insider trading regime." The chairman said he has asked SEC staff to make recommendations for reform, particularly regarding waiting periods, mandatory disclosure, and limits on cancellation and number of plans.

The subcommittee’s draft recommendation outlines three sets of recommended actions.

First, the subcommittee recommends restricting the "affirmative defense" protection, including:

• Require a "cooling off" period of at least four months between the adoption or modification of a Rule 10b5-1 plan and the execution of the first trade under the newly adopted or newly modified plan;
• Prohibit overlapping plans (i.e., a single person or entity may not have more than one Rule 10b5-1 plan at a time).

Second, the subcommittee recommends enhancing disclosure requirements, including:

• Require electronic submission of Form 144;
• Require enhanced public disclosure of Rule 10b5-1 plans, including in proxy statements and Form 8-K;
• Enhance disclosure of 10b5-1 trades on Form 4;
• Ensure all companies with any securities listed on U.S. exchanges (including ADRs and ADSs filing Form 20-Fs) are subject to Form 4 reporting requirements.

Finally, the subcommittee encourages the Commission to evaluate its access to information necessary to effectively monitor trading plans established under Rule 10b5-1, and to pursue regulatory action to obtain that information if not unduly burdensome to issuers and insiders.

Discussion. According to the meeting agenda, the subcommittee recommendations will be discussed on the afternoon of the September 9 meeting.